Economic powers endorse plan for averting financial crises

Saturday, April 12, 2008

The Associated Press

WASHINGTON -- Finance officials from the world's top economic powers endorsed a plan Friday aimed at preventing another financial crisis like the credit and mortgage debacles that erupted in the United States and quickly sent tremors around the globe.

Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke hosted the Group of Seven discussions, where officials embraced a plan that would seek to increase the openness, or transparency, of financial markets and to sharpen regulators' response to urgent financial problems.

Besides the United States, the other members of the G7 are Japan, Germany, Britain, France, Italy and Canada. Friday's action preceded the weekend meetings of the 185-nation International Monetary Fund and the World Bank.

The plan is designed to make financial markets less secretive and improve supervision, which in theory would help prevent a repeat of the current financial debacles.

It calls for strengthening oversight to make sure financial companies have sufficient capital, cash and risk-management practices to handle problems.

It also would bolster transparency and the valuation of complex investment products, improve the operation of credit-rating agencies, strengthen authorities' responsiveness to risks and put in place arrangements to deal with stress in the financial system.

One recommendation is to have banks, securities firms and other financial institutions disclose their holdings of risky securities, such as those backed by subprime mortgages given to people with tarnished credit. Those subprime mortgages, which soured with the collapse of the U.S. housing market, were at the heart of the U.S. crisis.

Another involves having credit rating agencies distinguish the ratings they give for regular securities, such as corporate bonds, from those they assign to more complex investments. These agencies have been criticized for contributing to the problems by not accurately assigning risk to mortgage-backed investments.

Yet another recommendation would strengthen supervisors' guidance to banks for dealing with cash crunches and having banks run "stress tests" to see how they cope under different scenarios of financial strain.

The plan also calls for the Basel Committee on Banking Supervision, an international body of regulators, to make sure banks have enough capital to cover any potential losses.

Meanwhile, ongoing efforts by the U.S., backed by the G7, to prod China to let its currency rise in value also were discussed. China's undervalued currency has been blamed for contributing to the United States' swollen trade deficit and the loss of millions of factory jobs. The G7 officials welcomed progress that Beijing has made on the currency front but said the country needs to move more quickly to let its currency rise in value.

The G7 officials welcomed efforts by some central banks, including the Fed, to expand lending to squeezed financial institutions to help ease market turmoil.

The head of Germany's central bank, Axel Weber, also welcomed U.S. efforts to stabilize markets. "I think that the measures that were taken in the U.S. have already had some effect," Weber said.

Paulson said there was intense interest among the G7 officials about the state of the U.S. economy, the world's largest.

When Bernanke was talking about it, "I didn't see anybody dozing off," Paulson quipped. The Treasury secretary acknowledged that the first three months of this year was a "tough quarter" and said he expected the current April-to-June period to be "relatively tough" as well. Many private economists believe the economy contracted in the first quarter and could still be ebbing now.

Masaaki Shirakawa, the governor of the Bank of Japan, said stagnation in the U.S. economy is enhancing uncertainty about the world economy. Ministers, he said, "have to recognize the complex situation."

Soaring oil prices also are complicating the global outlook.

In the United States, high energy prices are acting as a double-edged sword: they are causing people to spend less on other things, thus adding another drag on growth. And, they increase the risks of an inflation flare-up as other companies boost their prices in response. U.S. gasoline prices hit another record Friday of $3.365 a gallon, according to AAA and the Oil Price Information Service.

The G7 finance officials had a dinner scheduled for Friday night that was to include executives of some of the world's biggest financial companies. The idea: Look at the causes and consequences of the recent financial turmoil. Officials invited to those talks included top executives of Citigroup, Deutsche Bank, Barclays, Credit Suisse, Lehman Brothers and Morgan Stanley.